Mid-market LBO issuance hits pre-crisis levels

Demand for mid-market leverage also saw covenant-lite issuance reach $3.8bn in Q3, almost overtaking the $4bn loaned in 2016.

Leveraged buyout issuance in the US mid-market has reached its highest level in a decade, according to data from LCD, a unit of S&P Global Market Intelligence.

Financial sponsors completing deals worth up to $350 million borrowed $9 billion of LBO finance during the first three quarters of this year, exceeding the $5.9 billion loaned across the duration of 2016, according to LCD’s Q3 Middle Market Review.

Sponsor activity accounted for almost $4 billion of mid-market LBO loans during the third quarter, the highest quarterly volume since 2007.

Demand for mid-market leverage was driven by covenant-lite issuance, which reached $3.8 billion in the third quarter alone, almost overtaking the $4 billion loaned during the entire of last year. Cov-lite accounted for 42 percent of all mid-market leverage during this period, including for LBOs, up from almost 25 percent in the third quarter of last year.

“We see credit facilities as small as $250 million in size that are being done cov-lite,” Ken Kencel, chief executive of Churchill Asset Management, said in a statement accompanying S&P’s data.

“As a result, the upper mid-market has become more syndicated, more distributed and more underwritten to sell,” Kencel said. Lenders in this part of the market have shifted from the “storage business” into the “moving business”, often at the expense of covenants and other structural protections, with lower pricing and higher leverage, he added.

In 2007, only 29 percent of institutional debt issued in the US was cov-lite. In Europe, the figure was 7 percent, according to separate data from LCD.

This rocketed to 75 percent of newly issued institutional debt in the US last year, and 60 percent in Europe. In January 2006, less than 1 percent of outstanding leveraged loans in the US were cov-lite; last July that figure was almost 73 percent.